Knowledge Highlights 10 June 2020

The Singapore Court of Appeal in the recent case of Suying Design Pte Ltd v Ng Kian Huan Edmund and other appeals [2020] SGCA 46 considered the requirements for establishing a claim of minority oppression under section 216 of the Companies Act, as well as the distinction between an oppression action under section 216 and a derivative action under section 216A of the Companies Act.

In an instructive judgment, the Court of Appeal reaffirmed the importance of bringing a claim through the correct legal mechanism and that section 216 should not be used to vindicate essentially corporate wrongs.

On the facts of the case, the Court of Appeal found that the personal wrongs the plaintiff alleged were committed against him were insufficient to establish oppression under section 216 of the Companies Act. The Court of Appeal stated that, overall, the plaintiff’s action smacked of an abuse of section 216 relief.

Allen & Gledhill Partners William Ong and Lee Bik Wei represented one of the successful appellants, Suying Design Pte Ltd, in this case. 

Facts 

Mr Edmund Ng (“Mr Ng”) and Ms Patty Tan (“Ms Tan”) were founders, shareholders and directors of Suying Metropolitan Studio Pte Ltd (“SMSPL”). A dispute between them led to Mr Ng commencing a claim for minority oppression under section 216 of the Companies Act against SMSPL, Ms Tan and Suying Design Pte Ltd (“SDPL”). Mr Ng was the sole shareholder and director of Metropolitan Office Experimental Pte Ltd (“MOX”), while Ms Tan ran SDPL. It was common ground that all new business from the date of SMSPL’s incorporation, whether emanating from Ms Tan or Mr Ng, would be routed to SMSPL, while existing staff of SDPL and MOX would effectively join SMSPL.

Sometime in August 2015, Mr Ng resigned from SMSPL. The shareholders agreed for SMSPL to cease business thereafter. Mr Ng then commenced an action against Ms Tan for minority oppression and also sued SDPL for the payment of receivables collected by SDPL.

At the core of the dispute was the parties’ differing treatment of invoices issued by SDPL and MOX after the incorporation of SMSPL. According to Mr Ng, there was an oral agreement between the parties for all such receivables to be transferred to SMSPL after deducting expenses incurred by MOX and SDPL for their respective projects. On the other hand, Ms Tan said the oral agreement was that MOX and SDPL would retain their receivables for their pre-SMSPL projects but would reimburse SMSPL for the use of SMSPL’s resources in completing these projects.

Mr Ng also disputed the propriety of payments made pursuant to debit notes issued by SDPL to SMSPL (“Debit Notes”). These Debit Notes were signed off by Ms Tan, who claimed they were repayments of loans made by SDPL to SMSPL.

The alleged breaches of Mr Ng’s version of the oral agreement were a central aspect of Mr Ng’s oppression claim against Ms Tan.

The High Court preferred Mr Ng’s version of the oral agreement to Ms Tan’s version, and found that several of the repayments pursuant to the Debit Notes accounted for receivables transferred by SDPL to SMSPL under Mr Ng’s oral agreement. Accordingly, repayment of the same by SMSPL to SDPL via the Debit Notes was wrongful. The High Court also found that several personal wrongs were committed against Mr Ng, including his exclusion from decision-making in relation to SMSPL’s affairs. In addition, the High Court allowed claims with overlapping features of corporate and personal wrongs, including the claims in relation to repayments made by SMSPL to SDPL under the Debit Notes and withdrawals from SMSPL’s bank account for the purposes of Ms Tan’s gratuity and adjusted salary (“Gratuity Payments”). The High Court held that the requisite commercial unfairness to Mr Ng was established on the basis of the personal wrongs and overlapping claims, and allowed the claim for minority oppression by Mr Ng. The High Court also made restitutionary orders against SDPL to pay over receivables to SMSPL based on Mr Ng’s version of the oral agreement.

Court of Appeal decision 

Factual findings on the oral agreement

On how the parties operated, the Court of Appeal noted that in the early years of SMSPL, the common understanding must have been that Ms Tan would bring in the bulk of the customers, while Mr Ng would gradually take over the management of the business. The evidence showed that Ms Tan fulfilled her end of this understanding by bringing in the vast majority of SMSPL’s business. However, it was also evident that Mr Ng and Ms Tan did not pay much attention to the precise financial implications of their collaboration in respect of projects that were started in their respective outfits, MOX and SDPL, and which were completed and invoiced after the incorporation of SMSPL.

On the facts, the Court of Appeal overturned the High Court’s findings in favour of Mr Ng’s version of the oral agreement. In this regard, the Court of Appeal found that there was a paucity of reliable evidence and that neither Mr Ng nor Ms Tan had discharged their respective burdens of proving their version of the oral agreement. It was therefore not possible for an oppression claim by Mr Ng to be founded on the oral agreement.

Given that Mr Ng was the party bringing allegations of wrongful conduct, the burden of proof fell on him to make good his allegations. As the Court of Appeal did not find any oral agreement to have been established, it followed that Mr Ng failed to show that the sums of monies were wrongly paid by SMSPL to SDPL under the Debit Notes. No wrongs were established by Mr Ng in relation to the purported loan repayments under the Debit Notes.

Section 216 claim for oppression 

Since the Court of Appeal found that there was no oral agreement, there could not have been any breach of Mr Ng’s legitimate expectations under his version of the oral agreement. This meant that several of the overlap claims could not be sustained, save for the claim relating to the Gratuity Payments, which was not founded on the oral agreement.

In this respect, the High Court had found that the injury Mr Ng sought to vindicate was the injury to his investment in SMSPL. However, the Court of Appeal held that the mere fact that injury had been caused to a shareholder’s investment was insufficient to constitute a distinct personal injury.

The Court of Appeal observed that section 216 of the Companies Act should not be used to vindicate wrongs which are in substance wrongs committed against a company, and which are thus corporate rather than personal in nature. This is essential in preventing improper circumvention of the proper plaintiff rule in Foss v Harbottle (1843) 2 Hare 461. The proper plaintiff rule provides that the proper plaintiff to seek redress for a wrong done to a company is prima facie the company itself. The corollary of this is the no reflective loss principle. Where the minority shareholder’s loss is merely a reflection of the loss suffered by the company which would be made good if the company were able to and did enforce its rights, the proper party to recover that loss is the company and not the shareholder.

Therefore, Mr Ng as a minority shareholder had to show that there had been injury to his interests as a shareholder which did not merely reflect that suffered by SMSPL.

On the facts, the Court of Appeal was of the view that any loss suffered by Mr Ng in respect of the Gratuity Payments would merely be a reflection of the loss suffered by SMSPL. Accordingly, the right mechanism for bringing the claim for the Gratuity Payments would have been a derivative action under section 216A of the Companies Act.

The Court of Appeal also held that the personal wrongs alleged by Mr Ng did not amount to oppression. The Court of Appeal stated that, overall, Mr Ng’s action smacked of an abuse of section 216 relief, which could not be clearer from his initial insistence on a buy-out of his minority holding in a company that he knew would cease business and be dissolved following his decision to exit the company. Mr Ng had also decided to leave SMSPL for personal reasons and not because of any allegedly oppressive acts. The Court of Appeal therefore set aside the oppression claim, including the order that SMSPL be wound up as that order was premised on the High Court’s finding that oppression had been established under section 216. The restitutionary orders that the High Court had made in relation to the oppression claim, which required SDPL to pay SMSPL its receivables, were also set aside.

Key takeaways

The Court of Appeal judgment is significant as it clarifies the law on oppression and sounds a warning to shareholders, who seek to be bought out of a company by alleging oppression, that they have to show something more than a corporate wrong to the company (which can be addressed by derivative remedies under section 216A of the Companies Act).

The judgment reminds that it is important for parties to identify the nature of any purported wrongs and seek redress for those wrongs through the correct cause of action. If the wrong cause of action is pursued, redress will not be available, whether or not wrongdoing is established on the facts of the case.

Further, the judgment provides a timely reminder for shareholders and business partners to put any agreement they have in writing, in particular for parties entering into a joint venture or business together. Otherwise, the costs spent on forensically examining the parties’ conduct to decipher any oral agreement or understanding after a dispute breaks out would be out of proportion to the costs to seek counsel and put the understanding or agreement in writing. For any oppression claim, in assessing whether or not there is commercial unfairness, the court will bear in mind that the essence of a claim under section 216 lies in upholding the commercial agreement between the shareholders of a company, irrespective of whether the agreement is found in the formal constitutional documents of the company, in less formal shareholders’ agreements or, in the case of quasi-partnerships, in the legitimate expectations of the shareholders. This underscores the importance of setting out the understanding or legitimate expectations between the shareholders in writing to avoid future conflict. 

Reference materials 

The Court of Appeal judgment is available on the Supreme Court website www.supremecourt.gov.sg or by clicking here.

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